S&P upgrades Spain’s credit rating to ‘BBB+’

Spain’s credit rating was boosted to BBB+ by Standard & Poor’s, which cited reforms to labor regulations, improved export competitiveness and easier financial conditions for the economy.

The outlook for the rating is stable, S&P said in a statement Friday. The one-level upgrade was the first step taken on Spain’s rating by S&P since it upgraded the country to BBB in May 2014. The new rating is three levels above non-investment grade.

“The upgrade reflects our view of Spain’s strong, balanced economic performance over the past four years, which is gradually benefiting public finances,” S&P said. The company expects economic growth to average 2.7 percent from 2015 to 2017, up from a previous estimate of 2.2 percent after a review in April.

The Spanish economy is growing at the fastest pace in eight years as the nation puts behind it the worst economic crisis in its democratic history. Even so, the Bank of Spain estimated Sept. 30 that growth slowed to 0.8 percent in the third quarter and said the economy may be seeing a “loss of vigor.”

While economic fundamentals are stronger as the pace of job creation accelerates, and output continues to outpace its euro-area peers, Spain is braced for volatility as it gears up for a general election on Dec. 20.

S&P said the potential for a fragmented environment following the ballot could lead to slippages in fiscal and structural reforms that could put Spain’s medium-term deficit and growth targets at risk. The vote will pit Prime Minister Mariano Rajoy against an array of left-wing rivals with polls showing no party winning a majority in parliament.

A “significant uncertainty” is whether future governments will preserve or extend reforms that have enhanced competitiveness, S&P said. One of the company’s main assumptions is that Catalonia, which held elections on Sept. 27 that were framed as a referendum on independence from Spain, will remain part of the country.

“I’m half surprised by the upgrade — this is an election year and the risk now is that reforms are either going to be postponed, or scrapped altogether if the opposition gets to power, ” said Geoffrey Minne, an economist at ING Bank in Brussels, said by phone.

Spain’s 10-year bond yield was at 1.78 percent on Friday, the lowest in four months. The yield was above 4 percent two years ago. Investors often disregard sovereign ratings grade and outlook changes.

S&P said it expects Spain’s general government fiscal deficit at 4.5 percent of GDP this year, missing the government’s 4.2 percent target. The impact of some growth drivers such as tax cuts and lower oil prices will probably fade, while others such as labor reforms will contribute permanently to the country’s recovery, it said.

Source: Bloomberg